December 24, 2004

Indexing to prices may look sensible to Americans, but the reduction in future benefits from the present plan is likely to be severe. By 2075, under the most commonly accepted economic assumptions, indexing benefits to prices rather than wages would mean that benefits would be nearly 50 percent lower than under the current system. Many privatization plans call for such an adjustment.

Will the magic of private investment accounts make up for the reductions? The answer is no. We can compute how retirees fare if they earned the historical average of 4.6 percent a year (after transaction costs) on a portfolio of stocks and bonds. William Dudley, chief economist of Goldman Sachs, has calculated that benefits for a typical retired one-earner family would come to about 93 percent of the projected benefits from the present Social Security system in 2022. In 2075, the benefits would fall to only 77 percent of present-system benefits.

And more:

To determine how sensitive retirement income is to the rate of investment return, Mr. Dudley worked out some calculations under Reform Model 2. The results are stunning.

If a worker earns just the respectable expected bond rate of 3 percent a year, or 2.7 percent after transactions costs, then the typical one-earner family will retire on only about 58 percent of the projected benefits under current law. If the investor earns zero over time, which may well occur for some investors, the projected retirement benefit is only a little more than 38 percent of the current benefit. These are considerably worse than the projected adjustments needed to bring the present system into balance.

I noted this the other day, but didn't have the numbers to back it up. Under Bush's privatization scheme, there is no way for a worker to choose a "safe" retirement option. Investing your private account in low-risk bonds would net you what amounts to about $460 a month today. Given that the vast majority of Americans don't actually want the risk of private accounts for themselves, this seems pretty relevant, no?

(Speaking of which, if the vast majority of Americans don't want private accounts for themselves, how exactly will Bush's little scheme unfold in practice? Will Americans who opt out of private accounts still receive benefit cuts? And if not, then aren't we merely making the current system more expensive?)